Why the extra Stafford loan subsidy should expire as originally planned

Both political parties want to extend indefinitely the “temporary” lower interest rate of federally subsidized Stafford loans, a move estimated to cost taxpayers $30 billion over five years.

The same President Obama who once pledged we were done “kicking the can” on tough decisions is pandering for the youth vote (on Jimmy Fallon, no less) by insisting we extend the largesse. Meanwhile, in a discouraging development, the same Mitt Romney who insists we have to slash spending and reverse course on Obama’s “government-centered society” quickly caved and joined Obama’s call to extend the break.

Politics is ugly to watch sometimes.

Frederick Hess makes some good points that bolster my view the government should let the extra subsidy expire.

The Stafford is a middle class entitlement. We’re not talking about Pell grants for poor students. We’re talking about whether students can get an even bigger subsidy on already-subsidized loans.

Everyone has an offset to “pay” for the extension. Newsflash: we’re borrowing a trillion bucks this year. None of this is paid for. Any cuts we find could trim that debt. We need all those cuts and to let the 3.4% rate expire.

We really need to stop suggesting that it’s okay renege on obligations when we decide we no longer like the terms of contracts we voluntarily signed. It’s been a meme the last few years, especially with Occupy Wall Street, and it makes it really hard to teach students to honor their obligations.

Related articles

• Should the Lower Interest Rate on Stafford Loans Be Extended? (usnews.com)
• Political battle looms over doubling of student loan interest rate to 6.8%

Political battle looms over doubling of student loan interest rate to 6.8%

President Obama begins an all-out push on Friday to get Congress to extend the low interest rate on federal student loans, White House officials said, an effort that is likely to become a heated battle along party lines. If Congress fails to act, the interest rate on the loans, which are taken out by nearly eight million students each year, will double on July 1, to 6.8 percent….

With student debt at a record high of $1 trillion, the effects of this change would be widespread.  The debate becomes about who should pay, the borrowers or the taxpayers?

The Congressional Budget Office has estimated that a one-year freeze on the interest rate for subsidized Stafford loans would cost $6 billion.

The history

The low interest rate stemmed from the 2007 College Cost Reduction and Access Act, which reduced interest rates on subsidized Stafford loans over the following four academic years — from 6.8 percent to the current 3.4 percent — with the proviso that the rates would revert to 6.8 percent this July…

A political trap for Republicans and a win-win situation for President Obama

The pre-planned doubling forces GOP politicians to either approve a Democratic measure that extends the low interest rates, or else face protest from millions of students and their middle-class parents.

Many GOP legislators dislike the subsidized interest rate because it inflates education costs while delivering a disguised subsidy to the Democrats’ political allies in the education industry.

The trap “kinda makes sense,” said Mark Kantrowitz, publisher of Finaid.org, a financial aid website.

“It’s a ‘Heads I win, tails you lose,’ scenario, where if President Obama succeeds in getting it extended a for a year he gets a victory for a key segment of the voters [and] if it gets blocked, he can blame his opponents for blocking it.”

“Either way he wins,“ Kantrowitz said.

Mr. Courtney said he was hopeful that some Republican support would be forthcoming as the political stakes became more apparent.

If higher loan subsidies are approved, the poorest students could come out losing.

Outside Congress, even some of the strongest student-aid advocates debate the question. While nearly everyone is in favor of the broad goal of college affordability, some experts point out that even 6.8 percent is lower than the rate on most private student loans. And they question whether it is worth risking cutbacks in the Pell program for low-income students, one possible consequence of using more federal money to keep interest rates low on the Stafford loans, which are in wide use by middle-income students.

Congress curtails Pell Grants and federal loan grace period

The budget finalized by Congress on Saturday curtails some federal student financial aid programs.

The two most important changes: A reduction in the number of years students can receive Pell Grant money and the temporary elimination of a six-month grace period on interest payments on federal student loans.

Pell Grant maximum eligibility period cut from eight to six years

College students taking longer than six years to obtain their undergraduate degree would have their Pell grants cut off next school year under a $1 trillion budget bill passed Friday in the House.

Millions of students each year receive Pell grants, which are offered to low-income students and don’t have to be paid back.

The bill keeps the maximum grant award at $5,550, but seeks to save $11 billion over the next decade in Pell dollars, in part, by reducing the maximum number of years the grant can be received from nine to six.

It is estimated that this change would affect about 100,000 individuals, typically part-time or transfer students.

Federal loan grace period

… Congress suspended the six-month grace period on loan interest for graduates with subsidized Stafford loans.

Stafford loan borrowers will still get a six-month reprieve upon graduation from having to pay back their loans, but the principal on the loans will accumulate interest during that period for loans issued between July 1, 2012, and July 1, 2014.

Also will be harder to qualify for automatic zero Expected Financial Contribution (EFC)

It appears that a lower income will be needed to qualify for the automatic zero EFC loophole

The bill also reduces the income level under which a student will automatically be eligible to receive the maximum Pell grants from $30,000 to $23,000. 

Some basic college financial aid terms

FAFSA -Free Application for Federal Student Aid
It’s a form you fill out and submit to the government. The Office of Federal Student Aid determines your eligibility for getting student aid (including PELL grants, and work-study programs). You’ll need your parent or guardian’s help though, because it asks for information such as their income. It is recommended that you fill out the form as close to January 1st as possible. Don’t wait! Completing, and submitting this form should be the first step of your financial aid process.

EFC-Expected Family Contribution
This dollar figure is how much (the government) expects your family to contribute to your education for one year. The figure is calculated from the FAFSA information you provided, and factors such as family size, number of family members in college, family savings, and current earnings affect it. Usually, the lower your EFC, the more financial aid you’ll receive.

SAR-Student Aid Report- (ISIR- The Electronic Version of SAR)
A summary of your FAFSA responses, it’s sent back to the student electronically or in paper version after their FAFSA is processed. The SAR is also sent to the college’s you’ve selected to receive it. The colleges or universities will use this information to determine if you’re eligible for federal-and possibly non-federal-financial aid.

PROFILE
This is an online financial aid application service offered by the College Board, used to determine if you qualify for non-federal student aid. More than 500 colleges, universities, graduate and professional schools use it. It’s an efficient way for students to report their financial data to their schools of choice.

PELL
Federal Pell Grants are awarded to (usually) undergraduate students. They are not a loan; they do not have to be repaid. The amount you receive will depend on your financial need, your costs to attend school, whether your a part-time or full-time student, and your plans for length of attending school.

STAFFORD
Stafford loans are low-interest loans for (eligible) students to help cover the cost of higher education. You can use it for a four-year school, community college, or trade, career, or technical school. Students borrow directly from the U.S. Department of Education at participating schools.

There are two types of Direct Stafford Loans: Direct Subsidized Loans and Direct Unsubsidized Loans. Direct Subsidized Loans, as the ones described above, are for students with financial need. They are not charged interest while in school, as long as it’s part time. For Direct Unsubsidized Loans, you are not required to prove financial need, and interest accumulates on the loan from the first time you borrow the money.

From Noelle Smith, a student at Drake University in Des Moines, Iowa.

Cutting Pell Grants and subsidized loans would lead to student riots?

This weekend, July 16th and 17th, members of Congress and the President are likely to craft a debt reduction deal that could slash Pell grants.

July 25 is Save Pell Day.

Mark Kantrowitz predicts dire consequences, including colleges forced to close and students rioting:

The game of chicken being played out in Washington, DC, may have serious consequences for student financial aid as well as the rest of the economy….

Instead of defaulting on the debt, the White House would need to decide which among the other expenses must be cut….

In such an environment, spending on student financial aid would almost certainly be eliminated. Student financial aid is not one of the top spending priorities according to internal rankings by the Office of Management and Budget. It isn’t even in the top 10. Effectively this means that the Federal Pell Grant program and the federal education loan programs, which together represent more than $150 billion a year, would be suspended. This would force millions of students to drop out of college because they could not afford to pay for college without student aid. This, in turn, would force most colleges to lay off faculty and staff. Many colleges would have to close. The only alternative would involve doubling tuition rates, guaranteeing nationwide tuition riots.…

During the ongoing debt negotiations, one side proposed eliminating the subsidized interest on federal student loans. Currently, the federal government pays the interest on subsidized Stafford loans during the in-school and grace periods. Both parties have already proposed eliminating the subsidized interest on loans to graduate and professional students. The new proposal would eliminate the subsidized interest for undergraduate students as well, saving the federal government an additional $4.3 billion a year.

According to Kantrowitz, eliminating the subsidized interest benefits would increase the amount of debt at graduation by about 8%.   That’s not good, especially for students graduating with poor prospects for well-paying jobs.

Cuts in federal financial aid spending will likely curtail the administration’s overriding objective of enrolling more students in college, which might not be a bad thing.  Fixing the problem of high school graduates unprepared for college-level work should take priority over the goal of higher education for everyone.

Previous post:  The end of subsidized Stafford loans?

The end of subsidized Stafford loans?

Inside High er Ed– As talks continue and the deadline approaches on increasing the federal debt limit, the federal government’s subsidy for undergraduate student loans is now on the table….

The proposal would end the subsidized Stafford loan program, in which the federal government pays the interest that accrues while students are enrolled in school….

Subsidized loans, which are awarded based on financial need, make up just under half of all Stafford loans, which are the federal government’s largest pool of student loans. Students who borrow the maximum amount of subsidized loans, $23,000, and take six years to graduate would owe $5,000 more by graduation and $9,000 after a 20-year repayment period, said Pauline Abernathy, vice president of the Institute for College Access and Success…

The elimination of the subsidy, combined with the fact that the interest rate on federal student loans is slated to double next year — to 6.8 percent — would mean that low-income college students would graduate with far more debt…

As Congress and the White House have put forward plans that slash spending in recent months, student aid programs have come in for their share of cuts, and there is widespread agreement, even among the programs’ supporters, that some kinds of changes will be necessary. The Pell Grant Program, which has become increasingly expensive, is perceived to be vulnerable not only in the talks about long-term deficits, but in more immediate deliberations over the next federal budget, for 2012….

Losing the interest subsidy is far from ideal, and could harm student borrowers, they said. But other options, such as a Pell Grant cut, would be far worse.

“Certainly it would be a blow to students,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators, who said he strongly objected to the idea of shifting funds from student aid toward deficit reduction. “But it doesn’t decrease the total amount of aid available to them up front to pay for college.” A cut that could change whether students are able to pay for school at all, such as lowering the maximum Pell Grant, would have a more dramatic effect, he said.

It sounds as if any change to Stafford loans would simply add more to the amount owed upon graduation.  With all the stories of naive students taking on massive debt while failing to realize the potential negative repercussions, maybe an “up front” cut in aid would actually be a better idea.  Or, is that being too harsh?

President Obama’s reaction to cutting student loan subsidies:

 “I’m not going to do that,” Obama said. “I’m not going to take money from old people and screw students,” not without some compromise on the tax-increase side.

Found at Instapundit